[Darkened Financial M&A] Financial Groups with Ample Funds... Worried About Nowhere to Invest

Merger and Acquisition Effects Boost First Half Performance
Urgent Need for Overseas Expansion, but Challenges Persist
Rising Corporate Value and Declining Listings

[Asia Economy Reporters Kiho Sung, Sunmi Park, Seungseop Song] Major financial groups have been enjoying a boom in performance by reaping the benefits of corporate mergers and acquisitions (M&A) conducted so far, but the declining momentum for additional M&A is being perceived as a crisis. In particular, strengthening the portfolio of non-bank sectors, which has been the background for record-breaking performance in recent years, has become an essential condition for survival. Amid adverse conditions such as aggressive moves by big tech (large information and communication companies), COVID-19, and a low-interest-rate environment, the situation for non-bank M&A to overcome these challenges is not easy, deepening the concerns of financial holding companies.

According to the financial industry on the 19th, the four major financial holding companies?KB, Shinhan, Hana, and Woori?have acquired about 20 major assets over the past five years. These acquisitions are evaluated as having complemented the weaknesses of each financial holding company, including domestic insurance companies, trust companies, and overseas subsidiaries to establish footholds for overseas expansion. For example, KB Financial Group's life insurance competitiveness within the group was only ranked 17th by assets in 2019, but Prudential Life Insurance, acquired in August last year for 2.34 trillion KRW, improved this. It posted nearly 200 billion KRW in earnings in the first half alone, with a contribution ratio surging to 7.7%. Shinhan Financial Group also recorded a net profit of 216.8 billion KRW in the first half of this year from Orange Life, which was secured through an investment of 3.2489 trillion KRW. This is a 57.7% increase compared to the same period last year. As a result of aggressive M&A, KB Financial Group maintains top positions in its financial subsidiaries by sector: 1st in banking, 8th in life insurance, 4th in non-life insurance, 5th in securities, 2nd in credit cards, and 2nd in capital. Shinhan Financial Group also holds strong positions with 2nd in banking by total assets, 4th in life insurance, 6th in securities, 1st in credit cards, and 5th in capital.

The decisive factor behind the record-breaking performance of the five major financial holding companies (KB, Shinhan, Hana, Woori, NH Nonghyup) in the first half of this year was the performance of the non-bank sectors. The net profit of the five major holding companies in the first half of this year was 9.3729 trillion KRW, a 45.6% increase from 6.4335 trillion KRW in the same period last year. While the banking sector's net profit increased by 27.3% year-on-year, the non-bank sector grew by 83.3%. In the competition for first place among financial holding companies in the first half of this year, the contribution ratio of the non-bank sector was 45.2% for KB Financial Group and 46.6% for Shinhan Financial Group.

Aggressive M&A is also the reason banks transitioned their governance structure to a financial holding company system. Under the Banking Act, banks can secure investment stakes up to 40% of their own capital, but under the financial holding company system, they can hold investment stakes up to 130% of their own capital. This allows for securing additional investment capacity, making it easier to expand size and diversify business through acquisitions of non-bank financial companies.

Currently, financial holding companies have sufficient investment ammunition for M&A, so there is room to further expand their size. According to the latest report by Korea Credit Rating, as of the end of March this year, the double leverage ratio of domestic financial holding companies was 114.8%, corresponding to grade 1 in the Financial Supervisory Service's financial structure stability evaluation index.

However, M&A by financial holding companies has not gained momentum this year. While the pace of financial industry entry by big tech and platform companies is accelerating, there is an urgent need to reduce dependence on the banking sector, create synergy among financial affiliates through business diversification, and expand overseas to escape the saturated domestic financial market. But the stalled M&A makes it difficult to secure an escape route.

In a liquidity-driven market, many securities and capital companies have recorded record-high operating performances, raising the overall corporate value of non-bank financial companies, and the number of M&A targets has decreased. The increase in geopolitical risks beyond the control of each financial company and COVID-19 are also cited as factors.

Jung-hoon Kim, a researcher at Korea Credit Rating, pointed out, "Large-scale investments in securities and capital companies continue to improve profitability, and the risk profile of operating assets handled by non-bank financial companies is also expanding."

This content was produced with the assistance of AI translation services.